By Megan Leonhardt | Wednesday, August 13

Hope Floats. The S&P 500 and Nasdaq Composite posted record days as the odds of a September rate cut climbed—even as Federal Reserve officials attempted to tamp down expectations. 

The S&P 500 and Nasdaq posted relatively small gains—0.3% and 0.1%, respectively—but that was enough to hit fresh highs. The Dow Jones Industrial Average rose 464 points, or 1%, bringing it within 0.2% of its December 2024 record high.

The solid market performance was helped, perhaps, by the fact that there was nothing on the economic calendar today. Chicago Fed President Austan Goolsbee and Atlanta Fed President Raphael Bostic both delivered slightly more hawkish remarks today, indicating that while upcoming policy meetings will be live, they're not feeling an immense pressure to cut just yet. 

That's going to give greater heft to upcoming economic data, including tomorrow's release of the producer price index data for July. Economists expect the latest measure of wholesale inflation to show input costs were up notably in July. 

“One hallmark of the new trade era is the consistent argument that tariffs will be paid by the exporter. The July producer price index, to be released on Thursday, should provide further evidence that this is probably not the case,” writes Joe Brusuelas, chief economist at RSM US.

Instead, Thursday’s data are likely to confirm that U.S. businesses are absorbing much of the costs associated with higher tariffs. Companies have absorbed 64% of the tariff costs through June, according to recent research from Goldman Sachs’ economist Elsie Peng.  But Peng expects that to fall to less than 10% in the coming months as firms pass along those costs.

The producer price index for total final demand is expected to increase 2.4% year-over-year for July, one-tenth of a percentage point more than in June, according to the consensus estimate from economists surveyed by FactSet. Economists anticipate PPI rose by 0.2% on the month after remaining unchanged in June.

The core PPI, which excludes food and energy prices, is seen increasing 2.9% compared with 2.6% previously. 

DJIA: +1.04% to 44,922.27
S&P 500: +0.32% to 6,466.58
Nasdaq: +0.14% to 21,713.14

The Hot Stock: Paramount Skydance +36.7%
The Biggest Loser: Jabil Inc. -4.9%

Best Sector: Materials +1.9%
Worst Sector: Consumer Staples -0.0%

Caution Ahead

Treasury Secretary Scott Bessent kicked off the day by reiterating his calls for Federal Reserve officials to lower interest rates by half a percentage point at the upcoming September policy meeting. Odds have inched up, but futures markets remain largely skeptical—and for good reason.

A quarter percentage point cut at the September Federal Open Market Committee meeting is essentially locked in, but bets on a bigger rate cut remain elusive. There’s now a 6.2% probability that the Fed cuts by 50 basis points next month, according to CME’s FedWatch tool. (A basis point is a hundredth of a percentage point.)

For once, futures markets are actually proceeding with caution—and their stance is likely merited. The debate about the path ahead for rate policy hinges on the balance between the Fed’s dual mandates of maintaining price stability and maximum employment. The majority of the committee, including Fed Chair Jerome Powell, have indicated that they continue to see labor conditions as broadly balanced, even as inflation hasn't returned to the Fed’s 2% target.

This means that much of the calculus for whether the FOMC will cut rates, and by how much, will hinge on the August employment data due out on Sept. 5. If the data reveal that labor conditions continued to substantially deteriorate this month, economists believe that Fed officials will jump into action, while still likely only cutting by 25 basis points.

Unless the August jobs report is “really bad,” PNC Chief Economist Gus Faucher doesn’t see a 50-basis-point cut happening. And a bad report would likely need to include outright job losses in August, plus either June or July job growth revised down to show a decline, and unemployment rising from the current rate of 4.2% to 4.4%.

"The Fed is still concerned about inflation, particularly with core inflation picking up in July and set to accelerate more over the next few months because of tariffs,” Faucher tells Barron’s. The labor market isn’t as strong as believed couple of weeks ago, but it’s still in “OK shape” he adds. Even after the revisions, the outlook for near-term inflation is trending higher, so the FOMC will be reluctant to cut more than 25 basis points.

“Essentially, the question of cutting short-term rates in September (or not) comes down to how [officials] view the potential damage done to the Committee’s credibility by tolerating above-target inflation for too long,” writes Steven Ricchiuto, U.S. chief economist, Mizuho Securities USA.

In fact, even if the softer July inflation data have provided Fed policymakers with some flexibility to cut rates in September, it is far from obvious that the Fed will quickly follow with another cut in October, writes Jon Hilsenrath, senior advisor at StoneX.